We’re now two quarters in for the bank stocks when it comes to the Federal Reserve and its moves to lower interest rates. And in that, this latest round of earnings reports has started to highlight the winners and losers in the sector.
Sure, with the Fed cutting rates and treasury bonds moving lower, net interest margins — or the difference between what a bank charges for loans and what it hands out as deposits — have shrunk across the board. This has pressured many of the bank stocks and their bottom lines. However, we’re starting to see a very defined trend of haves and have nots when it comes to the sector.
For some of the major bank stocks, profit growth continues to be elusive — either thanks to their own internal issues or by way slowing loan growth. For these financials, the changing environment is and will continue to be a major struggle. And yet, there are a few bank stocks that are starting to find their mojo, even though the Fed has made things a bit difficult.
The obvious take for investors is to sell the bad bank stocks and focus on the good. With most of the major money-center and large financials, we now have a clearer picture of who is who.
With that, here are one buy, one hold and one sell among the major bank stocks.
Bank Stocks: Buy J.P. Morgan Chase (JPM)
Once again, J.P. Morgan Chase (NYSE:JPM) proved why it’s one of the world’s top banks. Despite the tougher economic environment for banks and declining net interest rate margins, JPM managed to once again hit it out of the park on a variety of fronts.
To start with, consumer banking remains robust. Average deposits grew 5% year-over-year and 1% quarter-over-quarter at the big bank. Meanwhile, home, auto and consumer credit all rose on the quarter. Similarly, commercial banking assets and loans also managed to see some impressive growth over the last three months. Total assets at the bank now stand at a staggering $2.77 trillion.
And while net interest margins may have declined, the bank as able to overcome those issues via its continued use of tech, mobile, and online banking. The number of people using its mobile services grew by over 12% during the quarter. That’s important as mobile and online banking is cheaper to run and comes with a higher margin than branches.
As if this good news wasn’t enough, JPM stock continues to deliver on its fortress balance sheet and safety initiative. The bank now easily clears its required Tier One ratio. Better still, it should have no problems buying back more shares and boosting its dividend further.
For investors, the quarter is another reason why when it comes to bank stocks, JPM stock is always a big buy.
Hold Goldman Sachs (GS)
The main culprit for Goldman’s 26% year-over-year profit decline came from its investing and lending division. It’s here that the bank holds its investments in public and private companies.
The biggest stinker here was WeWork. The bank held a nearly 1.4% stake in the firm, and as WeWork’s valuation leading up to its ill-fated IPO dropped, so did Goldman’s stake. For the quarter, Goldman Sachs reported that it lost $80 million on its investment in WeWork. Goldman managed to also lose $267 million in other tech stocks such as Uber (NASDAQ:UBER) on the quarter.
However, not everything was terrible for GS stock. In fact, there was a lot of good.
The best aspect continues to be its consumer banking business. Both deposits and loans continue to grow like weeds at Marcus, while Goldman successfully launched its Apple (NASDAQ:AAPL) partnered credit card. At the same time, Goldman’s asset management business — through its suite of low-cost smart-beta ETFs — has become a huge hit. The result is that this consumer division is still seeing great growth and didn’t manage to slow during the quarter.
For investors, this is wonderful news. Yes, WeWork as a big miss for the bank stock. But longer term, Goldman Sachs’ future is tied to Marcus. Investors should ignore the near-term noise and hold shares of GS stock.
Sell Wells Fargo (WFC)
At its core, Wells Fargo (NYSE:WFC) isn’t necessarily a bad firm. WFC still features very high return on assets and continues to be successful at hooking affluent clients. Its just that given its legal and scandal overhangs, there are better choices among the bank stocks. And you can see the issues those two fronts are having with the bank when looking at its latest quarter.
Issues from its 2016 scandal that involved the company opening up more than 3.5 million fake accounts continue to weigh on not only WFC stock, but the bank’s profits as well. Additional scandals — such as its mortgage foreclosures and auto loan issues — haven’t helped either. During the quarter, Wells Fargo was required to take a $1.6 billion legal charge for these various issues. That managed to hurt earnings by more than 35 cents per share. Overall diluted earnings per share clocked in a of 92 cents, for the quarter.
The problem is that this compares to $1.13 for the year-ago period. Moreover, Wells Fargo’s current profits also included a 20-cent-per-share gain courtesy of an asset sale. Relatively, you’re looking at a much lower number.
Where it could get worse for WFC is that the legal and regularity overhang hasn’t gone away just yet. And new CEO Charles Scharf is expected to really dig in, start cutting and remake the bank. So, more charges and missed estimates could be on the way. This isn’t great news especially when the Fed is cutting and net interest margins are going down.
Given the other choices among the bank stocks, WFC stock could be a sell and might make a great candidate for tax-loss harvesting until the legal overhang is finished.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.